Autumn calm follows summer storms

The currency contagion that pushed around emerging markets over the summer calmed substantially in September, as did the rhetoric from the Sino-US trade war and the volatility in the commodity markets. But where the markets calmed, the weather did not, with two major hurricanes making landfall. Meanwhile Value indices around the world outperformed their regular indices for the third month in a row. But doth three swallows a Value autumn make? We’ll see.

Oct 2018


  • The US imposed fresh tariffs of 10%, rising to 25% on 1 January next year, on China goods worth around US$200bn. China responded with its own tariffs on a limited $60bn of US goods, although many analysts believe the response was deliberately measured in an attempt to cool the rhetoric. The markets responded by rallying modestly, as investors had been expecting an immediate 25% US tariff increase and a response in kind from China.
  • The currency contagion, which pushed emerging market equity indices around over the summer, faded. Turkey’s lira found its footing after the central bank hiked rates again, to 24% while Brazil’s real and Russia’s ruble also showed some stability as the US dollar fell a smidge. The exception was Argentina, which saw its peso slide another 5% in a day when its central bank chief resigned after just three months. The peso steadied after the IMF agreed to increase the country’s credit line by $7bn.
  • The US Federal Reserve raised interest rates by 25 basis points to 2-2.25%, as largely expected. It was the eighth such increase in this cycle and the third this year. The accompanying statement made no mention of the trade dispute with China and instead concentrated on the stronger US economy while dropping the “accommodative” word. This hinted that a further rate hike will follow in December, while the market continues to price in three more hikes in 2019.
  • The UK’s departure from the EU, known as Brexit, became messier than it already was after EU leaders rejected Prime Minister Theresa May’s plan for a compromise exit agreement. The arrangement, known as the “Chequers” deal, was already deeply unpopular in the UK, but PM May insisted it was the only option to avoid a “hard” exit, in other words, the UK leaving without a workable trade deal. The pound dropped sharply on the news sending the dollar earners in the FTSE100 higher.
  • The markets may have calmed, but the weather did not. One major Atlantic hurricane and one huge Pacific cyclone formed and, for a brief time, built themselves into category five storms simultaneously. The US’s North and South Carolinas measured the rainfall in feet from Florence, while the Philippines and then southern China, suffered windspeed damage and landslides from Mangkhut. The costs of the storms are still being estimated but stand at around $22bn for Florence, according to Moody’s, and about $2bn in China and $400m in the Philippines from Mangkhut, according to local insurance estimates.
Autumn -1
Autumn 2


  • Global equities ignored the weather and calmed themselves from July and August’s currency-driven tantrums. The pattern of Developed Markets outperforming Emerging ones continued, although the mix within the trend changed. This month, Japan outperformed the US, while in the EM world, Latin America and EMEA outperformed Asia, again reversing the trend of the summer months. Turkey (despite posting an eye-watering interest rate rise of 6.25%), and Russia (after oil prices rose and its central bank raised interest rates) led the gainers, while India and the Philippines fell sharply.
  • Overall, the MSCI Emerging Markets Index continued to drop marking the seventh month out of nine in 2018 to show a loss. Despite a China rally late in the month (see below) the MSCI China index was down 1.4% as tariff worries added to softer economic growth numbers for much of the month. Index heavyweights, Korea and Taiwan, also dragged as trade-related concerns continued to weigh.
  • Indian stocks fell in the second half of the month as financials, especially Non-Banking Financial Companies (NBFCs), came under pressure on contagion fears after lender IL&FS defaulted on its debt payments. Rising rates and tighter domestic liquidity caused by advance-tax payments added further pressure on NBFCs whose primary source of funds is borrowing. This triggered a correction in the broader market as debt holders sold stocks to cover liquidity calls, sending the MSCI India index down 9.1%.
  • After being in the doldrums for a few months, China’s stocks finally sparked back into life in the second half of the month after Beijing promised to stimulate domestic consumption to partially offset the negative effects of US tariffs. The local CSI300 index rose 3% in a single day, its largest such move in two years supported further by reports of state funds buying equities.
  • Doth three swallows a Value autumn make? We’ll see. Value stocks in emerging markets outperformed the main index for the third successive month and are now outperforming year to date. In Asia, the MSCI AP ex Japan index fell 1.4% vs MSCI Asia Pac Value up 0.6%; year to date, the main Asia Pac index is down 5.3% vs Value down 4.5%. The Value rally was not confined to EM or Asia either; a spike in longer-term bond yields in the US boosted financial stocks there, sending Value indices higher.
Autumn 3
Autumn 4


  • Global government bond markets were generally weaker over the month. In the US, 10-year US Treasury yield rose by 20 basis points to close the month at 3.06%, as the Federal Reserve hiked rates by 25 basis points. Investors were also focused on the higher-than-expected 2.9% year-on-year increase in August’s average hourly earnings, the quickest pace of increase since 2009.
  • In Europe, yields were broadly higher, as the European Central Bank identified the “relatively vigorous” pickup in underlying inflation, although this rise was tempered by a weak end-of-month eurozone core inflation print as well as a larger-than-expected 2019 Italian budget deficit target. 
  • USD-denominated credits in Asia were hurt by the rise in US interest rates, although a tightening of credit spreads across the Asian credit complex helped to offset performance weakness. Asian high yield outperformed, led by non-investment grade sovereigns, which saw more significant spread compression.
  • Asian local currency bond markets were weaker in September as policymakers embarked on more monetary policy tightening. Domestic rates in Hong Kong and Singapore tracked the rise in US Treasury yields over the month, while central banks in the Philippines and Indonesia hiked their respective benchmark rates by 50 basis points and 25 basis points respectively.


  • Oil prices continued to rise with Brent crude passing the US$81 per barrel level to reach four-year highs. The immediate causes were signs not only that physical supply was tightening with deliveries from Iran drying up ahead of the re-imposition of US sanctions, but also as other OPEC producers declined US requests to increase production to counter the higher prices. Some analysts began to talk of $100 oil returning by the beginning of next year after Iranian sanctions are fully implemented.
  • The Shanghai Futures Exchange launched copper futures in a bid to rival London and New York, adding to the soya and sugar contracts introduced last year. Volumes, at least on day one, dwarfed rival exchanges. Meanwhile copper prices (in London) rose and hit six-week highs as investors speculated the trade tariffs would have a softer impact on global growth than first feared. The same tone around trade sent the dollar lower, and gold responded with a modest rally.
  • Nickel prices, which until August, had been the only base metal showing gains for the year, finally succumbed to tariff concerns and fell 16% over the quarter. The metal had stayed resilient because of its use in electric car batteries and a decline in inventory levels however investors became increasingly aware that stockpiles were merely being re-located..
  • In the soft commodity sphere, soybean futures hit ten-year lows before rallying in the final week. The trade dispute between China and the US has led to an almost dead stop in grain trade between the two countries, with soybeans being hit hardest. Soybean farmers had more misery imposed on them by Hurricane Florence that soaked and rotted crops in southern US states.


  • US dollar gains paused in September at least against most of its G10 counterparts, with the Scandinavian currencies, Swedish krona and Norwegian krone, gaining more than 3%. These two currencies tend to be good barometers for risk appetite while the rally in the krone also coincided with the recent rise in oil prices.
  • Meanwhile, the euro and UK pound also gained more than 1% against the US dollar. The euro saw some upside as risk appetite improved. The pound initially made some strides after positive headlines on Brexit negotiations but fell as subsequent talks in Salzburg failed.
  • The Japanese yen was the biggest underperformer against the dollar in the G10, leading to exporters on the equities exchanges to gain and send the Nikkei to 27-year highs. Elsewhere in Asia, the Indian rupee fell over 2% versus the dollar and continued its march above the key 70 level. The central bank tried to impose measures to offset weakness and reduce the widening current account deficit but none of these measures were seen as being sufficiently credible to stem rupee weakness.
  • In Indonesia, policymakers announced measures to mitigate the current account deficit and encourage onshore corporates to convert their dollar holdings to rupiah leading to a more subdued depreciation this month. Asia’s key outperforming currencies were current account surplus countries such as Thailand, Singapore and Taiwan but they all gained less than 1%. China’s yuan lost slightly over 0.5% against the dollar despite September’s US tariff announcement.
  • The improvement in risk sentiment gave a boost to currencies that had been hit hard this year including the Turkish lira, South Africa’s rand, and Russia’s ruble. The lira gained more than 7% against the dollar after the central bank’s surprise 6.25% rate hike that was well above expectations. Russia also surprised the markets and hiked rates by 25bps. In South Africa, the rand gained on the improvement in sentiment and also on President Ramaphosa’s comments that he believes the currency is undervalued.
Autumn 5
Autumn 6


  • The US continued to grow. Q2’s revised figure GDP growth of 4.2% beat consensus estimates and August’s Industrial Production rebounded on strength in the utility and mining sectors, especially shale oil production. Retail sales were a little soft however growing at just 0.1% in August. Initial jobless claims hit 50-year lows, the unemployment rate remained unchanged at 3.9%, and year-on-year inflation (CPI) dropped to 2.7% from July’s 2.9% reading, reflecting the personal income figure rise of just 0.3% for July. Finally, as mentioned above, the Fed raised rates by 25bps.
  • Japan’s central bank made no change to its monetary policy and kept rates on hold as expected. August CPI figures reached just 1.3%, still well short of the BoJ’s 2.0% target but the highest level in six months.
  • The ECB kept rates on hold, as largely expected, with refinancing kept at 0% and deposit rate at -0.4%. It also said its asset purchasing programme (QE) would slow to €15bn in October from €30bn in September, again as largely expected. Economic data was mixed with Services PMI for September higher than August but Manufacturing lower. The UK’s central bank said the country defied the domestic political drama and saw retail sales surge for August as a result of the hot weather. Elsewhere, Norway hiked rates in response to higher inflation.
  • China saw retail sales growth back up at 9% after slowing in August; Industrial Production growth also grew slightly, again reversing August’s numbers but consumer price inflation rose to a six-month high of 2.3%, above expectations but still well below the 3% target. The trade surplus narrowed to $27.9bn overall but widened with the US to $31.0bn, with exports to the US increasing in August despite tariffs setting in.
  • Russia raised its base interest rate to 7.5% from 7.25% in a bid to control inflation and give the ruble some support. Rates had been steadily falling from a high of 17% in December 2014, and the hike represents the first raise since then. Meanwhile Turkey raised its key base rate 6.25% to 24%, again in an effort to curb inflation and halt the slide in the lira.

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